France, a Tax Haven? Yes, for Microsoft to China’s Huawei

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France's President Francois Hollande
The jobs being created and the technological ecosystem the tax breaks are spawning is just what French President Francois Hollande needs as he struggles to rekindle growth and reverse record-high joblessness. Photographer: Balint Porneczi/Bloomberg

Move over, Ireland.

Companies from Microsoft Corp. to China’s Huawei Technologies Co. scouring Europe for fiscally attractive shores are turning to an unlikely country: France.

As a base for research and development teams, that is.

Tax breaks for R&D, 5.6 billion euros ($7 billion) this year alone, combined with world-class scientists are making France a honey pot for technology companies. As the French parliament debates how to shrink the country’s budget deficit this month some lawmakers are demanding reining in the R&D credits, saying some companies are abusing them. President Francois Hollande has pledged it’s a budget line he won’t touch.

“The research tax breaks are decisive -- they make France economically more attractive,” said Olivier Piou, who heads Gemalto, an Amsterdam-based developer of security products for bank cards, mobile phones and passports. The fiscal breaks offset a significant part of Gemalto’s R&D budget, making it more compelling to keep 30 percent of its 2,000 researchers worldwide in France, Piou said.

Ireland’s corporate tax rate of 12.5 percent, less than half France’s 33.3 percent, ensures companies from Google Inc. to Apple Inc. keep their European headquarters in the Celtic nation. Still, for R&D, global companies are increasingly beefing up their teams in France, transforming the country into a European technology hub, mirroring the U.K.’s dominance in the financial industry and Germany’s manufacturing prowess.

Hollande boasted about the “edge” the measure gives France during his nationally televised interview on Nov. 6. “Often we have our handicaps, but here we have an advantage,” he said.

Technology Ecosystem

The jobs being created and the technological ecosystem the tax breaks are spawning is just what Hollande needs as he struggles to rekindle growth and reverse record-high joblessness. The measure, introduced in the 1980s, was expanded by former President Nicolas Sarkozy. It is among the few of his predecessor’s policies retained by Hollande.

“The drivers of our economy aren’t the same as they were in the 1950s,” Economy Minister Emmanuel Macron said today during a technology conference in Paris. “I can tell you tech is key for our future growth.”

More than 17,000 companies, ranging from biotechnology and energy to software and gaming, are cashing in on the tax advantages and subsidies for innovation this year in France, with an average break of about 323,500 euros. The R&D tax break is France’s second-biggest behind a payroll credit, a measure to spur competitiveness, according to the Budget Ministry.

The move, meant to keep the brightest minds and high-value jobs at home, is also prompting foreign companies to set-up laboratories or hire French algorithm whizzes.

Bright Spot

Redmond, Washington-based Microsoft runs a joint unit with state-backed research institute Inria, where some 100 scientists work on fundamental research. The lab, created about eight years ago, expanded from software security to linking computers and sciences like health, and protecting growing loads of data.

Phone network-equipment maker Huawei plans to recruit 200 researchers by 2017 in the southern town of Sophia Antipolis.

Hiring by such companies is among the few bright spots in an otherwise grim picture in France with unemployment rising and an economy in its third year without tangible growth. Companies from carmaker Peugeot SA to mobile-phone service provider Bouygues Telecom are firing staff as jobs go to low-cost countries or competition forces expenditure cuts.

Against that backdrop, Prime Minister Manuel Valls in September met with Huawei founder Ren Zhengfei to go over the Chinese company’s plans to invest $1.9 billion on R&D facilities in France over the next three years.

Fields Medal

Ren told Valls that France’s strengths in the fields of mathematics and engineering and fiscal advantages had convinced him to bolster the company’s presence in France, according to a company spokeswoman in Paris.

“The fiscal context isn’t our first motivation, but of course it’s an advantage France has over other countries,” said Isabelle Leung, a spokeswoman for Huawei in France. “In order of importance, we’re here for the competency of the candidates, the ecosystem, as well as the research tax breaks.”

France had 276,400 science, mathematics and computing graduates, according to the latest data by Eurostat. That makes it Europe’s third-largest contributor behind Germany and the U.K. More than 10 percent of French graduates did science, mathematics and computing, putting France ahead of the European Union average of 9 percent.

Yet again this year a Frenchman won the Fields Medal for Mathematics, making the country the winner of the honor the second-most number of times behind the U.S.

Cartesian Thinking

Google, which never filed for the French tax breaks, has continued to add researchers in the country. The company has 100 engineers working out of its Paris office on products from YouTube to Art Project and is hiring, a spokesman in Paris said. Talent is what Google has come to seek in France, not tax breaks, he said.

The French have “Cartesian thinking that software companies like us look for,” Gemalto’s Piou said.

The tax credit is the cherry on top for the likes of Romain Niccoli, co-founder and technology chief of Criteo SA, which helps target online shoppers with the best-fitting ads.

“If we didn’t have research tax breaks, we could’ve still gotten where we are today, but probably not as fast,” said Niccoli. “Great education is a strong incentive to keep R&D in Paris. We’ve also kept a lot of support functions here and created other jobs.”

Criteo has become a household name as one of France’s biggest technology successes with 444 million euros in revenue last year and a 2013 initial public offering on the Nasdaq. While France makes up only about 10 percent of its sales, Criteo has kept its R&D at home and grown that team yearly.

Other Support

French engineers are as good as their Silicon Valley counterparts while costing much less thanks to tax breaks that gives startups a much needed boost and convinces bigger companies to maintain their R&D in France, Niccoli said.

A walk around the company’s ultra-modern headquarters in central Paris shows some 500 employees -- of whom half are statisticians, mathematicians and computer engineers doing research -- working in rooms named after comic book heroes and going over planning by moving colored post-its around on the wall. Criteo has 1,200 employees worldwide.

France helps companies in other ways. It offers fiscal advantages for research to attract foreign investors through state-backed organizations like the Invest in France Agency.

Sovereign fund BpiFrance backs some innovative companies through subsidies, loans and capital funding. Last month, it unveiled investments in e-commerce site Cresus and renewable energy equipment maker Neoen.

Not Nerds

“Tech is key for job creation,” Economy Minister Macron said. “For me, tech is key for the French economy.”

Companies that spend significant amounts on R&D may also be eligible for the label “Jeune entreprise innovante,” or Young Innovative Company, which entitles them to lower labor charges for scientist employees.

“PhDs aren’t just nerds,” Education Minister Genevieve Fioraso said. “They have a sense of innovation, they can anticipate mutations -- we need them as much as we need sales people and managers.”

The R&D break, called the “credit impot recherche,” or CIR, allows companies to shave a portion of their corporate tax.

On Nov. 5, some lawmakers asked Hollande to cap the CIR tax credit. Companies today can claim such breaks for multiple units. The lawmakers want to limit it to one tax break per company. The measure would save the state 530 million euros, the parliament’s finance committee estimates.

Do More

As slowing growth caps government receipts, the state is making it harder to access the credits, said Thomas Gross, associate director at Sogedev, which advises companies on getting tax breaks and financing from the government.

Far from capping the measure, the government needs to tackle other matters to unleash growth, he said.

“Yes, France is getting growth from innovation, but that’s not enough to compensate other segments of the economy slowing down,” Gross said. “High labor costs and lack of flexibility - - that’s what weighing France down.”

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